Supreme Court Ruling : Some S&L; Mergers No Longer Tax Free

WASHINGTON — Mergers of two differing kinds of savings and loan associations do not qualify as tax-free reorganizations, the Supreme Court ruled Tuesday in a decision that apparently will enrich federal tax coffers by about $20 million.

Separately, the high court issued a copyright-law decision that could reduce the share that authors, songwriters and their heirs receive from their works’ long-range profits.

In the case involving S&L; mergers, the court ruled that taxpayers who surrender all shares in a stock-type S&L; in exchange for savings accounts or certificates of deposit in a mutual savings and loan must pay federal income tax.

Vote Against Taxpayers

Deciding by a 6-2 vote against two such taxpayers from Washington state, the court said: “We hold that (their) passbook accounts and certificates of deposit were cash equivalents.”

Justice William H. Rehnquist, writing for the court, said the tax exemption available for mergers of two stock-type S&Ls; cannot be used when a stock-type S&L; merges with a mutual S&L;, which is owned by its account holders.

The ruling means Harold T. Paulsen, president of Commerce Savings & Loan Assn. of Tacoma before it merged into Citizens Federal Savings & Loan Assn. of Seattle, and his wife, Marie Paulsen, must pay income taxes on the $209,508 worth of passbook accounts and certificates of deposit they received in exchange for their Commerce stock.

The two Washington savings and loan associations were merged in 1976.

Justices William J. Brennan, Byron R. White, Thurgood Marshall, Harry A. Blackmun and John Paul Stevens joined Rehnquist’s opinion. Justice Lewis F. Powell did not participate in the case.

Justice Sandra Day O’Connor, joined in dissent by Chief Justice Warren E. Burger, called the court’s ruling “unwise as a matter of policy and unwarranted as a matter of law.”

In the copyright case, the court, by a 5-4 vote, ruled that music publishers whose copyrights have been terminated by songwriters nevertheless retain the right to receive royalties from future sales of records and other “derivative works” licensed before the termination.

The ruling could have a substantial financial impact in the music industry. Lawyers involved in the case had told the justices that millions of dollars were at stake.

In 1978, the widow and son of Ted Snyder, co-author of the 1920s’ song “Who’s Sorry Now,” revoked the copyright Snyder had granted to Mills Music in New York City.

Marie Snyder and her son, Ted Jr., contended that they were entitled to all royalties from recordings of the song--and no longer were bound to the normal industry practice of splitting the royalties 50-50 with the music publishing company.

The U.S. 2nd Circuit Court of Appeals ruled for the Snyders, but by a single vote Tuesday the Supreme Court reversed that ruling.

The high court, led by Justice John Paul Stevens, said the appeals court misinterpreted federal copyright law.

Based on Original

The Copyright Act of 1976, the latest major revision of federal copyright law, allows copyright owners to revoke a publisher’s interest in the copyright. But the law says “derivative works” based on the original work may “continue to be utilized under the terms of the (copyright) grant after its termination.”

Both the Snyders and Mills Music agreed that record companies could continue to use the song, but they disagreed over whether the law allowed Mills Music to continue sharing in the collection of royalties.

The Supreme Court said the publishing company legally is entitled to continue sharing in royalties.

“Who’s Sorry Now” has been recorded more than 400 times.

Stevens was joined in voting for Mills Music by Burger, Powell, Rehnquist and O’Connor. White, Brennan, Marshall and Blackmun dissented.